Context India – Netherlands DTAA
Unlike most OECD based DTAA, the DTAAs between India and Mauritius, Singapore and Cyprus included a capital gains taxation based on tax residency. With the revision of these DTAAs, capital gains should (in principle) be taxed in India for entities resident in these countries. In other words, India should be entitled to tax capital gains arising in India. However, before foreign investors, structured funds or MNEs start exploring alternatives, they should take note that the amendments to (for instance) the India – Mauritius DTAA may (at least) theoretically have a limited scope and offer grandfathering provisions. In addition, any alternatives selected require careful consideration and possible revision of the upper-tier fund structure including the loss of beneficiary corporate law benefits. Observing these conditions and taking notice of the recent international tax climate, as well as the MLI, the India – Netherlands DTAA offers the following ingredients that could be of benefit when setting up companies in the Netherlands:
- The India – Netherlands DTAA provides for an exemption from Indian capital gains tax if a Dutch shareholder holds: a) less than 10% in an Indian company; b) in case of the sale of shares to a nonIndian resident purchaser; or, c) as a corollary from a group restructuring;
- The India – Netherlands DTAA includes a most favoured nation (“MFN”) clause. The MFN clause binds India to apply to the Netherlands any lower rate of withholding tax (“WHT”) or a scope more restricted than the rate or scope provided for in the India -Netherlands DTAA on the said item of income. Hence, the most limited definition of, for instance, fees for technical services (“FTS”), in all treaties concluded by India can be applied by Netherlands residents; and
